Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

15.2.3 Factors Influencing Incidence of Taxation 
The concept of incidence of a tax is of great significance as it 
explains the ultimate burden of taxation. To know the tax shifting 
and tax sharing for tax authorities it is important to discuss on 
factors influencing incidence of taxation. Change in price reflects 
tax shifting or tax sharing. The main factors influencing the price 
changes or tax shifting are: 
1) Elasticity of demand and supply 
2) Supply under different Cost conditions 
3) Market structure 
1) Elasticity of demand and supply: 
 
According to Dalton, ―the incidence is divided between 
buyers and seller in the elasticity of supply to the elasticity of 
demand.‖ 
Incidence on Buyers 
= 
Elasticity of Supply (es) 
Incidence on Sellers 
Elasticity of Demand (ed)
(i) 
When the elasticity of demand equates with the elasticity of 
supply (i.e. ed = es) the incidence 
– the money burden of the 
tax 
– will be equally divided between buyers and sellers; thus, 
the price will rise by half the amount of tax. 

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Figure 15.3 
In the above figure, the tax P
1
R = P
1
M + MR but P
1
M = MR. 
Therefore, the tax burden is exactly divided the half-half between 
buyers and sellers; and the price has
risen by P
1
M, the half of 
the total tax amount per unit. 
(ii) If the degree of elasticity of supply is greater than the elasticity 
than the elasticity of demand (i.e. es > ed): supply is relatively 
elastic and demand is inelastic, the greater
(iii) incidence will fall upon the buyers as the price will rise more 
than 50 percent of the tax per unit.